UltraTech Cement - Q3FY14 Result Update - Results in-line, near-term triggers missing:: Centrum

Rating: Hold; Target Price: Rs1,615; CMP: Rs1,719; Downside: 6%



Results in-line, near-term triggers missing



We retain Hold rating on UltraTech with a price target of Rs1,615
considering a) continued disappointment in cement despatches for the
industry, b) volatile cement prices due to lacklustre demand, c)
expensive valuations near to mean+sd1 despite lack of near term
triggers. During the quarter, result was largely in line with our
estimates on EBITDA and PAT levels, but OPM was slightly below
estimates led by higher freight costs and lower realization. We remain
concerned on the deterioration of earnings quality for cement
companies and will change our view only when there are signals of
demand recovery, which will also help cement prices to sustain at
higher levels.

$ Revenue in-line, OPM slightly below estimates: The company reported
Revenue of Rs47.9bn (vs. estimate of Rs47bn, decline of 1.5% YoY) led
by a drop of 1.9% YoY in blended realization. Sales volume was at
10mt, up 0.4% YoY (7.4% QoQ). Operating profit was at Rs7.6bn (vs.
estimate of Rs7.7bn) and profit at Rs3.7bn (4.9% above estimate of
Rs3.5bn). OPM at 16% was 49bps below our estimates largely due to
higher-than-expected freight cost (Rs1,122/tonne vs. est.
Rs1,105/tonne) and lower realizations (Rs4,796/tonne vs. estimate of
Rs4,837/tonne).

$ Lower realization and higher opex impact profitability: Operating
profit declined 25.4% YoY during the quarter led by fall in
realization (blended realization declined 1.9% YoY) and higher opex
(up 4.5% YoY on per tonne basis). Higher operating cost was primarily
due to an increase of 5.3% YoY in freight costs (led by higher railway
freight rates and diesel price) and 8.3% YoY increase in other costs.
Power & fuel cost declined 7.8% YoY due to an increased usage of pet
coke in the fuel-mix. Driven by higher operating costs and lower
realization, OPM declined 5.1pp YoY to 16%. Blended EBITDA/tonne
declined 25.7% YoY to Rs766/tonne.

$ Concerned with deterioration in earnings quality – expect cut in
Bloomberg consensus estimates: Cement companies under our coverage
universe have seen sharp cuts in earnings estimates in the past two
quarters due to earnings disappointment YTDFY14E. We had revised our
EPS estimates for the company downwards by 14.8%/11.6% for FY14E/FY15E
in our results preview note. The disappointment in earnings is due to
subdued sales volume, which resulted in increased volatility in cement
prices. Our earnings estimate for the company is 13.9%/8.5% below
Bloomberg consensus estimates and we expect downward revision in
consensus estimates.

$ Valuation and key risks: The stock trades at 13.2x/9.5x FY14E/FY15E
EV/EBITDA and 24.1x/18.5x FY14E/FY15E EPS. We value the company at 8x
Dec-15E EV/EBITDA and arrive at a value/share of Rs1,615. We have also
assigned Rs39/share for its acquisition of JCCL’s plant in the West
region. We maintain Hold rating on the stock with a possible downside
of 6%. Key upside risks to our thesis could be a) sharp increase in
cement realization and b) moderation in energy cost and other expense.
Key downside risks could be a) lower-than-expected sales volume, b)
lower cement prices and c) higher energy costs.



Thanks & Regards

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